Chances are, you’ve never heard about ERISA – an acronym that stands for the Employee Retirement Income Security Act – but it’s a federal law that has had a major impact on American’s retirement savings. And on Labor Day 2024 that law will be 50 years old!
Prior to its passage in 1974, there weren’t many federal protections for retirement benefits like pensions, even though those type programs had been in place in America going back to 1875 with the American Express Company. But in 1962 a major American auto manufacturer – Studebaker – went bankrupt – and roughly 70% of Studebaker’s workers were left without their promised retirement benefits after the South Bend, Indiana plant was closed in 1963. Of some 10,500 current and former employees in the pension plan, about 4,000 with more than 20 years of history at the company received only about 15 cents for each dollar they expected – roughly 3,000 shorter tenured employees got nothing.
ERISA did not require companies to have a retirement plan – it “only” required – and still requires – that those that establish plans meet certain minimum standards. It established federal standards for things like vesting, participation and eligibility – rules regarding reporting and disclosure about plan features, funding and investments to participants. It put limits on benefits – and gives participants the right to sue for benefits and breaches of their fiduciary duty under that law.
Ultimately, ERISA was focused on making sure that the benefit promises made to workers were upheld – and in that sense the EMPLOYEE retirement income security act was aptly named.
America’s retirement security has increased dramatically since ERISA’s passage. As of the latest (2021) numbers available, there is now more than $13 trillion (and another 11.5 trillion in IRAs, much of which came from plans like 401(k)s), covering nearly 100 million active workers (146 million in total) in more than 765,000 plans. Indeed, the Labor Department recently reported that plans disbursed $322.5 billion more than they received in contributions during 2021.
Fifty years on, ERISA—and the nation’s retirement challenges—may yet be a work in progress. But it’s hard to imagine American retirement without it.
Happy birthday, ERISA!
That’s Wella’s Way!